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Nasdaq on Verge of a Breakdown
The Smart Profits Report: Issue #327
Thursday, July 6, 2006
Nasdaq on Verge of a Breakdown: Key Points That Could Spell DangerBy Jim Stanton
Advisory Panelist, Mt. Vernon Research
Let me tell you right now…Nasdaq-watchers are worried. In the late 1990s, the Nasdaq propelled the markets forward at warp speed. And the Dow and S&P were only too happy to feed off its popularity.
But as you know, that popularity was nothing more than a fraud - a flashy period that became known as the “Nasdaq/Dotcom Bubble.” And when it came time to pay the piper, the index got crushed, losing more than 80% of its value over the next two and a half years.
Despite that upheaval, though, the Nasdaq 100 has generally sustained its status as a leading index. But it hasn’t demonstrated that this year, underperforming most of the indexes since January. Market technicians like myself are constantly analyzing weekly and monthly charts in order to spot potential changes or hazards in long-term trends. So let’s take a look at it to see if a long-term trend reversal is taking place and whether or not the Nasdaq is on the verge of a breakdown.
Struggling to Crack Resistance
This monthly chart of the Nasdaq 100 shows the massive fallout from that bear market. And while it has rebounded somewhat over the last three and a half years, take a look at the Fibonacci retracement levels (in red). Usually, a market will bounce back up to one of the more widely-used points at 38%, 50% or 62%.
But as you can see, after all that time, the Nasdaq 100 has only been able to rebound up to the lowest Fibonacci retracement level I use - 23.6%, which it hit in January, before moving lower again.
(Chart Courtesy of Trade Navigator Software: www.genesisft.com)
There are two ways to figure out what the next move will be.
You could draw a trendline off the lows, using any two points. Do this and you’ll see that the index broke below it in June - not a good sign.
However, over the past few years, I’ve found that it’s better to draw a regression channel with a 2% standard deviation. This is a more reliable and accurate method of calculating a change in trend than simple trendlines.
Take a look at the 2% regression channel in action below, with the monthly Nasdaq 100 chart, focusing on the rally that began in October 2002.
(Chart Courtesy of Trade Navigator Software: www.genesisft.com)
As you can see, the lower regression channel comes in around 1,549, with June’s low mark being 1,511 (on June 13).
In order to signal a change in the long-term trend, the index would have had to close below 1,549 on June 30. And although it flirted with that lower regression channel toward the end of the month, it didn’t happen. It closed at 1,575. As with trendlines, a close below that line is required at the end of the month to bring out the caution flag.
What does this mean? Simply put, the Nasdaq 100 is at a critical level.
Put Options Could Be Around the Corner
Since the index failed to close below 1,549 on June 30, the regression channel for July now moves up to 1,562. However, it’s hardly out of the woods yet. A trade below June’s low of 1,511 this month would confirm the breakdown, so you can bet that there are a lot of nervous traders watching this market very closely.
So far, the lower regression channel has acted as support against the May selloff - one that could merely have been a correction in an ongoing bull market. I’ve got my eyes peeled on this, because if a change in the long-term trend occurs, I’ll be favoring put options until the next trend change takes place.
Good Trading,
Jim Stanton
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Today’s Smart Profits Cribsheet
- Follow the Fibonaccis for power and profits: Get essential background information for this article by reading all about Fibonacci retracement levels in Smart Profits #313, Fibonacci Retracement Levels: Let “Leo” Calculate Your Support and Resistance, where I explain how this time-tested strategy lets you calculate your support and resistance levels with ease.
- Learn how to elevate your trading with technical analysis… Read how I use this simple technique to make money - and how you can spot bullish and bearish continuation patterns for yourself in Smart Profits #317, Continuation Patterns: Cashing In On Technical Analysis.
Related Articles:
- Technical Indicators: How to Overcome the “Twin Evils of Trading”
- Timing Your Trades: Two Ways to Expand Your Thinking And Your Profits
- Trading Index Options: Two Ways to Profit
